VZCZCXRO8372
RR RUEHCN RUEHFK RUEHGH RUEHKSO RUEHNAG RUEHNH
DE RUEHGH #0178/01 0880538
ZNR UUUUU ZZH
R 290538Z MAR 07
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 5647
INFO RUEHBJ/AMEMBASSY BEIJING 0923
RUEHCN/AMCONSUL CHENGDU 0521
RUEHGZ/AMCONSUL GUANGZHOU 0504
RUEHHK/AMCONSUL HONG KONG 0627
RUEHSH/AMCONSUL SHENYANG 0529
RUEHIN/AIT TAIPEI 0428
RUEHKO/AMEMBASSY TOKYO 0101
RUEHOK/AMCONSUL OSAKA KOBE 0001
RUEHNAG/AMCONSUL NAGOYA 0004
RUEHKSO/AMCONSUL SAPPORO 0001
RUEHFK/AMCONSUL FUKUOKA 0001
RUEHNH/AMCONSUL NAHA 0001
RUEHUL/AMEMBASSY SEOUL 0053
RUCPDOC/USDOC WASHDC 0116
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEHGH/AMCONSUL SHANGHAI 6022

UNCLAS SECTION 01 OF 04 SHANGHAI 000178 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR EAP/CM, EAP/J, EB AND E 
TREASURY FOR OASIA - DOHNER AND CUSHMAN 
COMMERCE FOR ITA DAS KASOFF, MELCHER AND MCQUEEN 
NSC FOR KURT TONG 
 
E.O. 12958: N/A 
TAGS: EFIN EINV PREL CH JA
SUBJECT: JAPAN-CHINA RELATIONS BACK ON TRACK IN SHANGHAI 
 
REF: 05 SHANGHAI 932 
 
¶1. (SBU) Summary.  According to Japanese contacts in Shanghai, 
Japanese Prime Minister Abe's October 2006 breakthrough visit to 
Beijing has dramatically improved the climate for Japanese 
investment in Shanghai, as well as led to an overall increase in 
cultural exchanges.  The number of Japanese Chamber of Commerce 
members and travel between the two countries hit record highs in 
¶2006.  While new Japanese investment in China has slowed, 
contacts said this was natural as "those who should be here are 
already here" and some firms had begun considering moving 
operations to less expensive areas such as Vietnam.  Though 
anti-Japanese sentiment among Chinese youth remained a concern, 
recent internet postings appear to be less virulent than in the 
past.  Contacts noted that a lot was riding on Premier Wen 
Jiabao's April trip to Japan and speculated both sides would 
likely try to downplay any public differences until after the 
trip.  End summary. 
 
-------------------------------------------- 
"Those Who Should Be Here Are Already Here" 
-------------------------------------------- 
 
¶2. (SBU) Pol/Econ Chief and Econoff met with Bank of 
Tokyo-Mitsubishi UFJ's Shanghai Branch General Manager and 
former head of the Shanghai Japan Chamber of Commerce Makoto 
Motooka on March 16 to discuss the current economic climate for 
Japanese businesses in Shanghai.  Motooka provided a positive 
assessment of the environment in Shanghai and noted that the 
number of Chamber members was at an all-time high of 
approximately 2000.  Recent figures from the Chamber indicated 
that there were between 6,000 and 7,000 Japanese-owned 
businesses in Shanghai, including approximately 1,000-2,000 very 
small-scale enterprises. 
 
¶3. (SBU) Motooka noted that new Japanese investment in China was 
down in both numbers of projects and total value and the rate of 
growth in the number of Chamber members had slowed to just 10 
percent in 2006, after 25 percent increases in both 2004 and 
¶2005.  He was not concerned by this slowdown and said it was 
natural since the initial wave of investment had ended and 
"those who should be here are already here."  He added that 
although some speculated that the April 2005 anti-Japanese 
demonstrations in Shanghai and other cities in East China (see 
reftel) played a role in this slowed growth, their long-term 
impact had not been very significant. 
 
¶4. (SBU) Contacts from the Japanese Consulate in Shanghai in a 
series of meetings in mid-March shared the same view as Motooka 
and reported that a "reassessment" of Japanese investment in 
China had begun even before the demonstrations.  The rising 
costs of operating in coastal areas, especially salaries, and 
exchange rate fluctuations over the past three to five years had 
led many Japanese firms in East China to consider moving 
operations to lower cost regions in Southeast Asia such as 
Vietnam.  Increasing concerns about the political situation 
after the demonstrations coincided with this economic 
reassessment, but should not be seen as the direct cause of the 
slowing growth of new investment. 
 
--------------------------------------------- ------------ 
Increasing Disposable Incomes Benefit Japanese Companies 
--------------------------------------------- ------------ 
 
¶5. (SBU) According to Motooka, short-lived calls for boycotts of 
Japanese products in 2005 have had no lasting impact, as 
Japanese brands were highly admired by Chinese for their 
superior quality, even those products made in China.  Major 
Japanese retailers such as Isetan, Sogo, Sanrio, Uniqlo and Muji 
remained extremely popular in increasingly fashion-conscious 
Shanghai.  During the initial phase of Japanese investment in 
China, the focus was on building assembly capability in China 
 
SHANGHAI 00000178  002 OF 004 
 
 
for export to overseas markets.  Most current investment 
projects, however, were now aimed at increasing or improving 
production capability intended for domestic Chinese markets. 
With the rapid rise in the number of Chinese with annual incomes 
approaching USD 10,000, consumers were becoming much more 
sophisticated and demanding.  Just as in Japan 35 years ago, 
increased disposable incomes had changed behavior, with more 
consumers willing to pay more for "intangibles" such as quality, 
style and ease of use - traditional strengths of Japanese 
manufacturers. 
 
--------------------------------------------- ------- 
Abe's Visit to China "Dramatically" Changed Climate 
--------------------------------------------- ------- 
 
¶6. (SBU)  According to Motooka and Japanese Consulate contacts, 
Prime Minister Abe's breakthrough October 2006 visit to Beijing 
had "dramatically" changed the climate for major Japanese 
investment.  Motooka cited the example of the international 
consortia bidding to construct the Shanghai-Beijing high-speed 
rail system.  Motooka opined that in this new environment, 
"Japan can be selected." 
 
------------------------------------------- 
Second Largest Expat Community in Shanghai 
------------------------------------------- 
 
¶7. (SBU) According to a Japanese Consulate contact, there were 
currently 45,000 long-term Japanese residents in Shanghai. 
Though the rate of new growth was slowing, Japanese still 
constituted the second largest expatriate community in Shanghai 
after Taiwan.  [Note: There are approximately 20,000 long-term 
AmCit residents in the Shanghai consular district.  End note.] 
Informal discussions with several private sector contacts and 
their families confirm that life in Shanghai remains very 
comfortable, with most enjoying the creature comforts which 
their similar position in Japan could not provide.  None of our 
contacts expressed any concerns of personal safety or had 
directly experienced anti-Japanese sentiment in either their 
daily lives or travels in China. 
 
¶8. (SBU) Motooka noted that the number of Japanese employees 
assigned to work in China had been leveling off recently, 
although overall numbers remained strong.  He added that with 
dramatic improvements in the quality of life in China's most 
cosmopolitan cities, Japanese employees were willing to take 
assignments in Shanghai or even Beijing.  Recruiting staff to 
work in China's smaller cities, however, remained a major 
challenge.   According to Motooka, with such a large presence, 
corporate social responsibility was becoming increasingly 
important to the entire Japanese community.  The Japan Chamber 
of Commerce had recently built two schools in Anhui Province, 
provided financial assistance to 100 local students and donated 
500,000 RMB to the Special Olympics ahead of the September 2007 
Games in Shanghai.  The Bank of Tokyo-Mitsubishi UFJ similarly 
provided 200,000 RMB per year to underwrite a series of 15 
lectures on financial issues in the Masters of Public Policy 
program at Fudan University. 
 
--------------------------------------------- ---------- 
Inbound and Outbound Tourism Hits Record Highs in 2006 
--------------------------------------------- ---------- 
 
¶9. (SBU) After a brief but significant drop-off in the number of 
Japanese visitors to China in the months following the April 
2005 demonstrations, the situation has dramatically improved. 
The Japan National Tourist Organization reported that a record 
3.745 million Japanese visited China in 2006 (vs. 3.334 million 
in 2004).  According to Motooka, due to the geographic proximity 
and shared cultural affinity, many Japanese travelers still 
considered China to be an attractive destination.  Chinese 
 
SHANGHAI 00000178  003 OF 004 
 
 
visitors to Japan in 2006 increased 24 percent to 811,700 (vs. 
616,000 in 2004), also an all-time.  Japanese Consulate contacts 
reported that growth in travel from Shanghai was particularly 
robust, as the Consulate issued more than 100,000 visitor visas 
to Chinese travelers in 2006, 25 percent more than in 2004. 
Consulate contacts also indicated that the thaw in relations 
since PM Abe's Beijing visit has resulted in a similar deluge of 
GOJ officials, often accompanied by business delegations, coming 
to China to meet their counterparts and survey the situation on 
the ground for themselves. 
 
¶10. (SBU) One Japanese Consulate contact noted that to 
facilitate the rapidly growing number of travelers, establishing 
shuttle service between Tokyo's in-town Haneda Airport and 
Shanghai's Honggqiao Airport remained an important priority for 
both countries - and a key potential deliverable for future 
high-level meetings.  [Note: Currently, all China-bound flights 
from Tokyo depart from Narita Airport, approximately 70 km from 
central Tokyo and all Japan-bound flights from Shanghai depart 
from Pudong Airport, approximately 30 km from the city center. 
End note.] 
 
--------------------- 
Increasing Exchanges 
--------------------- 
 
¶11. (SBU) The serious interest in Japan and Japanese culture can 
be seen in the increasing number of Chinese students studying 
Japanese.  According to Motooka, a record 210,000 Chinese 
students took the Japanese Proficiency Exam for Foreigners last 
year, 15 percent more than in 2005.  Although anti-Japanese 
sentiment among young Chinese continued to be a concern, 
speaking Japanese was still a highly marketable skill, 
especially in Shanghai.  Similarly, the number of students in 
Japan studying Chinese was also on the rise and interest in 
China was growing.  As Motooka noted quite simply, "It pays!" 
 
¶12. (SBU) On the cultural front, the situation in Shanghai has 
dramatically improved since PM Abe's visit to Beijing.   Chinese 
event organizers now felt comfortable using the phrase 
"China-Japan" instead of "international."  In fact, the press 
statement following Abe's visit announced that 2007 had been 
named the "Japan-China Year of Culture and Sports," in 
commemoration of the 35th anniversary of the normalization of 
bilateral relations.  The campaign, complete with an 
eye-catching logo (the "dynamic heart") and Japanese and Chinese 
catchphrases ("Carry the Hope Forward" in Japanese and "Hopeful 
Heart, New Future" in Chinese), is designed to "actively develop 
youth exchange" and "enhance friendly sentiment."   When asked 
what events were planned for Shanghai, however, contacts from 
the Japanese Consulate were hard pressed to cite anything other 
than the (previously scheduled) series of Asian Football 
Championship matches in April and some associated soccer clinics 
for local children. 
 
------------------- 
Watch What You Say 
------------------- 
 
¶13. (SBU) A contact from the Japanese Consulate said that 
recent postings on anti-Japanese websites and chat rooms 
appeared to be "less virulent" than in the past, with most 
netizens seemingly in line with Beijing's current engagement 
posture towards Japan.  However, Japanese officials were still 
cautious in what they said.  The contact stated that if a 
Japanese Finance Minister were to make public reference to the 
"underdeveloped" nature of the Chinese economy in the way that 
Secretary Paulson did during his recent trip to Shanghai, "there 
 
SIPDIS 
would be riots in the streets." 
 
--------------------------------------------- ------------- 
 
SHANGHAI 00000178  004 OF 004 
 
 
Nanjing Massacre Anniversary Should Not Disrupt Relations 
--------------------------------------------- ------------- 
 
¶14. (SBU) Despite the upcoming the 70th anniversary of the 
Nanjing Massacre in December and the slew of Chinese, Japanese 
and even American films timed to coincide with the event, 
contacts said the commemoration was not a major concern and 
would not seriously affect the current state of generally 
positive relations between the two countries. 
 
---------------------------- 
Expectations For Wen's Trip 
---------------------------- 
 
¶15. (SBU) While interlocutors were optimistic about Japan-China 
relations, many indicated that there was much riding on the 
success of Premier Wen Jiabao's April trip to Japan.  Many 
anticipated that a successful outcome of the Wen visit could lay 
the groundwork for a visit to Japan by President Hu later this 
year.  They said that in the meantime, there would be no 
significant changes to the status quo, and both sides would 
likely try to downplay any public differences which may arise 
before then. 
JARRETT